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Contents

About This FAM

Responsible Agency: Office of the Comptroller General
Issued: Nov 2006
Last Updated: July 2009

1. Introduction

Leased assets sometimes require improvements to make them suitable for their intended purpose. Leasehold improvements are expenditures relating to the alteration or modernization of the leased asset that appreciably prolongs the item’s period of usefulness or improve its functionality. Thus, leasehold improvements may qualify as a Tangible Capital Asset (TCA).

The Government of the Northwest Territories (GNWT) reports leasehold improvements in the Public Accounts so departments need to track and record them separately.

2. Policy

In accordance with the following provisions, the responsible department must determine if improvements to leased property qualify as a TCA.
 

3. Directives

3.1 Departments must record a TCA when improvements to a leased asset qualify as a TCA.
3.2

To be considered a leasehold improvement, the modification must have at least four characteristics:

  1. The modifications must be made to assets that have been leased;
  2. The lessee department/agency must pay for the improvements. If the expenses are the responsibility of the lessor then it will account for the expenses in its own records;
  3. The leasehold improvements should be durable, they should bring benefits to the department/agency for more than one year; and
  4. The improvement reverts to the lessor at the end of the lease (i.e. cannot be detached from the leased property).
3.3 Leasehold improvements must be disclosed separately to distinguish between assets the Government owns and those that it only has the right to use.
3.4

The capitalized value of a TCA resulting from an improvement to a leased asset should be amortized over the shorter of:

  1. the lease term plus the renewal period; or,
  2. the useful life of the improvement.
 

4. Guidelines

4.1 The basis for the determination of useful life may be past practice or the economic life if the asset. The use of professional judgment may be required to select the most appropriate period.
4.2 Examples of leasehold improvements that should be capitalized include significant upgrades to the electrical system to meet the needs of computer systems and the installation of walls and doors to create permanent offices. Examples of modifications that would not be capitalized include remodeling costs such as painting and carpeting.
4.3 Improvements made to an asset subject to an operating lease where ownership does not transfer to the lessee (i.e. lease does not contain a bargain purchase option or provide for transfer of ownership of the asset) should be classified as a leasehold improvement. Improvements made to an asset subject to a capital lease where ownership is expected to transfer to the lessee, should be classified as betterments. The cost of betterments should be capitalized as part of the cost of the capital asset and amortized over the useful life of the asset.
4.4 In cases where Public Works and Services (PW&S) carries the lease (e.g. general office space) the owning department/agency should be the sponsoring department/agency.
 

5 . Authorities and References

  • FAM 2201
  • PSAB (PS 3150.18-.20)
  • PSAB (PS 3150.21-.31)

6 . Consequences from Failure to Comply

Failure to comply with policies and directives of the Financial Administration Manual may result in actions under Part X of the Financial Administration Act. The Government of the Northwest Territories may seek legal remedy in the Territorial Courts.